This week’s Banker & Tradesman (October 19, 2009) has extensive coverage of and reaction to Land Court Judge Keith Long’s recent affirmation of his earlier decision that foreclosing lenders must have had assignments of mortgages already in place from the beginning of the process for the foreclosure to be valid. There’s a related story about the effect this will have on registries of deeds which includes an interview with me. I told the reporter that besides bringing us a new wave of foreclosure deeds, the one unresolved issue was how to handle the excise tax on the second foreclosure deed.
Here’s the problem: Because of the speed and frequency with which the promissory notes secured by mortgages were transferred among lenders, Wall Street and investors, the system had difficulty recording assignments of those mortgages in a timely and accurate fashion. Consequently, when lenders commenced foreclosure proceedings, there often was not an assignment of that mortgage to that lender on record, but the lender went ahead with the foreclosure anyway with the expectation of cleaning up the record after the fact. Judge Long’s decision renders such a foreclosure invalid because, without the assignment in place at the beginning of the process, the lender had no standing to carry out the foreclosure. With the foreclosure invalidated, ownership of the property would revert back to the borrower, but once the lender was able to record all necessary assignments, the lender could start the foreclosure process over again.
At the registry, we’re frequently presented with documents titled “confirmatory” something or other. Those are used when the initial document contained some flaw that necessitated correction or clarification (such as a name or address being spelled wrong). In this foreclosure scenario, however, there is nothing to confirm since the initial foreclosure was void. The new foreclosure deed (the one from the foreclosure conducted after the assignments were properly put in place) therefore is an entirely new transaction and cannot relate back to the earlier foreclosure deed.
We at the registry are obliged to collect an excise tax based on the sales price of the property. When the first foreclosure deed was recorded, we would have charged the appropriate tax and a tax stamp in that amount would have been affixed to that document. But if that foreclosure deed is void, what happens to the tax liability? My understanding is that in such a case (where the deed was void and the money was refunded), there was no taxable transaction and therefore no tax liability. In such a case, the person who paid that tax would be entitled to apply for an abatement of that tax from the Department of Revenue (the registry has no mechanism to pay out a refund).
When the second foreclosure deed (the “do-over”) gets recorded, we must charge the tax and affix a new tax stamp to that document. Lenders have argued that since they only paid consideration once and have already paid the tax based on that consideration, they should not have to pay a second time.
As a practical matter, that’s true. That’s what I told the B&T reporter and that was what was written in the story. Unfortunately, I failed to make clear to the reporter that technically, the correct way to handle this was for the foreclosing lender to pay the full excise tax on the second foreclosure deed and then seek an abatement (aka a refund) for the first deed (which was void). Just yesterday I heard from one of my colleagues who had spoken with DOR which advised him to get the money for the second stamp and advise the customer to seek an abatement of the first payment. Supposedly, a written ruling should be forthcoming on this. In the meantime, I do think that we are obliged to charge the tax on the second foreclosure deed and that it is the customer’s responsibility to obtain a refund for the first payment from DOR.